{"id":968,"date":"2010-10-16T20:59:40","date_gmt":"2010-10-17T00:59:40","guid":{"rendered":"http:\/\/thestockmarketwatch.com\/learn-stock-market\/?p=968"},"modified":"2016-04-26T14:42:18","modified_gmt":"2016-04-26T18:42:18","slug":"stock-picking-strategies-technical-analysis","status":"publish","type":"post","link":"https:\/\/www2.stockmarketwatch.com\/learn\/stock-picking-strategies-technical-analysis\/","title":{"rendered":"10) Stock Picking Strategies: Technical Analysis"},"content":{"rendered":"

Thus far we have talked about fundamental analysis.\u00a0 In this section we shall explore technical analysis (TA) which is the opposite of fundamental analysis.\u00a0 Technical analysts or technicians analyze market activity, prices, volume and other statistics and select stocks gathered from these data.\u00a0 Those who follow this method look at the different indicators and made inferences about the future stock prices.<\/p>\n

The Philosophy<\/strong><\/p>\n

John Murphy, technical analysis guru explained the basics of TA in his book “Charting Made Easy”.\u00a0 Here he outlines the core of technical analysis as well as the tools and underlying theories.<\/em><\/p>\n

“Chart analysis (also called technical analysis) is the study of market action, using price charts, to forecast future price direction. The cornerstone of the technical philosophy is the belief that all factors that influence market price – fundamental information, political events, natural disasters, and psychological factors – are quickly discounted in market activity. In other words, the impact of these external factors will quickly show up in some form of price movement, either up or down.”<\/p>\n

The most important assumptions of TA are:<\/p>\n

a) Markets are efficient<\/p>\n

b) Prices move in trends<\/p>\n

c) History repeats itself<\/p>\n

TA Don’ts<\/strong><\/p>\n

Technical analysts don\u2019t care for intrinsic value and other things that fundamental analysts look for.\u00a0 They usually ignore management style, business models and competition.\u00a0\u00a0 TA are more concerned about charts, graphs and trends and usually trade companies they know very little about.<\/p>\n

Is TA for long term strategy?<\/strong><\/p>\n

No.\u00a0 Technical analysts live a very active lifestyle.\u00a0 They constantly monitor the ups and downs of stock and take action based on these fluctuations.\u00a0 An investor who uses this strategy can go long or short on a stock depending on what direction the data is moving.<\/p>\n

Speed is important to technical analysts.\u00a0 Whilst value investors have to wait patiently for the market to correct the undervaluation of their company, TA have to decide almost immediately whether to hold or discard stocks using stop-loss-orders to mitigate losses should a company not perform to par.\u00a0 It takes a lot of trading skill to get in and out of sticky situations like this.<\/p>\n

Support & Resistance<\/strong><\/p>\n

Support and resistance are common concepts in the world of technical analysis.\u00a0 Traders usually buy and sell stocks at these levels because they indicate how well a stock might (or might not) perform.\u00a0 When TA expect a stock to start decreasing after a decline this is the support level.\u00a0 Once it begins to increase after a decrease this is the resistance level.\u00a0 When a stock hits support levels, TA will enter into a long position, while they enter a short position once resistance level strikes.<\/p>\n

Picking Stocks With TA<\/strong><\/p>\n

Technical analysts have a whole caboodle of tools to help them pick stocks.\u00a0 While no one tool is infallible, a TA must interpret these data with subjective process.\u00a0 Here are some popular examples of chart patterns used by technical analysts for stock picking.<\/p>\n